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Lombard Risk Managment (LRM)
Share Price: 8.5p
Shares in Issue: 400m
Market Capitalisation: £34m
“Lombard Risk (LRM) is a leading provider of regulatory reporting and collateral management solutions to the financial services industry. They count over 30 of the world’s ‘Top 50’ financial institutions among its clients.”
LRM came to my attention, this week, when I interviewed their CEO, Alastair Brown on the podcast. The news they released was, “Record Year for COLLINE® Milestones“.
In this release they announced, “substantial growth of its North American client base and major new product additions”.
I went back to their last set of interim and was also pleasantly surprised.
Their order book has contracted revenue at £9.2m (2015: £6.8m) up 35%.
Also important to note is that annual recurring revenue increased by 22% to £6.1m (2015: £5.0m), which is 40% of their revenue for the 6 months.
Sales for the period were up 58% on the previous year, with software licence sales up 106%
Cash at period end of £6.9m (2015: £2.7m) with no debt (2015: £Nil)
They made a loss before tax of £113k (2015: loss of £1.8m).
Note: LRM capitalise their development cost rather than showing it on the profit and loss account. If they reflected it on the profit and loss account the result would be negative EBITDA for the six-month period of £1.2m (2015: negative EBITDA of £2.3m) and a loss before tax of £1.4m (2015: loss of £2.5m).
Having said this, their cost of the capitalised costs as a percentage of their revenue is decreasing and they have undergone a substantial amount of change and refocus in the last year, with an aim to be cashflow breakeven in 2018.
Double digit growth is expected to continue over the next few years to the point where they are project to make a profit before tax of £9.4m in 2020 off revenues of £59m (source: Equity Development).
In a research note published by Equity Development, they write:
It is unusual to find a high tech software stock like LRM that is expanding its top line at >2x the industry average (or >7x global GDP), yet is priced at less than a third of sector EV/revenue levels.
LRM is in this position despite this morning saying that over the past year its collateral management software (COLLINE, 53% of turnover) had been successfully “delivered to a record number of clients across both the buy/sell-sides in North America, with 5 major customers going live” in 2017.
2. CONTRACTS & PARTNERSHIPS
LRM’s niche solutions are used by more than 340 banks, hedge funds, asset managers, prime brokers, corporate treasuries, utilities, oil groups, trading houses and other institutions – including 30 of the top 50 global banks.
LRM seem to gaining traction with their renewed focus in the last year, here’s some of their significant wins and partnerships:
22nd February 2016
Announced substantial growth of its North American client base and major new product additions.
Over the past year, COLLINE® has been delivered to a record number of clients across both the buy- and sell-side in the US and Canada, with 5 major clients going live in the current quarter.
8th December 2016
Signed a co-operation agreement with Atos, an international leader in digital services, to facilitate the delivery of Lombard Risk’s award-winning collateral solution, COLLINE®, to the German market from early 2017.
19th September 2016
Partnership with TMX Market Insights | Razor Risk for the provision of calculation and margin analytics.
5th July 2016
Its flagship regulatory reporting solution, AgileREPORTER® for OFSAA (Oracle Financial Services Analytical Applications), has been selected by a Fortune 500 Top 20 US Super-regional Bank to automate its US Federal reporting.
30th June 2016
Appointed by two major banking firms in North America to supply its award-winning collateral management, clearing, inventory management and optimisation solution, COLLINE®.
23 March 2016
Bank of Cyprus UK has chosen its reporting solution, AgileREPORTER for automated regulatory reporting.
18 March 2016
Lombard Risk Management signs a Technology License Agreement with Oracle America ($179bn market cap).
Under the Agreement, Oracle is licensed to sell Lombard Risk’s AgileREPORTER and regulatory reporting templates to integrate with its Oracle Financial Services Data Foundation. AgileREPORTER will form part of the Oracle Regulatory Reporting Solution being offered to banks globally to manage end-to-end reporting to Regulators.
The shares are quite tightly held, with 71.09% behind in the hands of major shareholders and management. Of the major shareholders, institutions are well represented by the likes of Legal & General, Hargreave Hale and Fidelity International.
The biggest shareholder, John Wiseby was the original founder of LRM in 1989 but on 18th August 2015 resigned as Non-executive Director.
Before being a non-executive director John Wiseby was the Chief Executive Officer but on the 19th May Mr Wisbey informed the Board of his intention to stand down as CEO in order to pursue other opportunities.
I’m not aware of Mr Wiseby’s intentions but it’s my guess that, having a less of a direct role in the company could mean he may want to reduce in his shareholding.
If this is the case then it may provide some downward pressure on the share price. Even though a drop in the share price is never welcome as a shareholder, due to it not being a reflection on the fundamental strength of the business going forward, it should provide an opportunity to accumulate more shares at a a lower level.
This is certainly my intention. My intitial buy was at 8.5p but have also placed a limit to buy more at 7.75p and will consider buying more should the share price drop further.
1. 8.75p is the level they raised £8.3m via a placing in June 2016 and Open Offer in July 2016.
2. 9.25p was the price Alastair Brown, CEO purchased 540,540 shares at on 20th October 2016.
3. 9p was the price Nigel Gurney, CFO purchased 168,961 shares at on 20th October 2016.
Technically the share price hit a, near, 5 year low on 10th March 2016 at 6.2p. Since then it has ralled to 10p and fallen back to trade in a range bewtween 7.5p – 9p from 20th October until now. The share price is currently above all the moving averages but a close above 9p should see it move further north.
Equity Development have a 20p target / share valuation, they state:
“In terms of the numbers, we make no change to our forecasts or 20p/share valuation, albeit reiterate that given the favourable macro backdrop and forex tailwinds, LRM appears significantly undervalued.
What’s more, as the business scales over time, there should be a good opportunity to lift EBIT margins closer to peer group norms of 20%, via improved operating leverage, continued efficient capital allocation and higher turnover per employee (£85k/head vs sector at circa £120k).”
If I can get my average down to 8p per share I think a 16p target is achievable, therefore providing 100% upside, minus dealing costs etc.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which has been phased in since it was launched by Obama in 2010 and had a September 1st 2016 deadline, means LRM have benefitted in the US.
This benefit is also likely to be experienced in Europe now, as financial institutions must meet the European March 1st 2017 start date, of similar regulatory reform.
“It has been reported that President Trump is promising to roll-back some elements of the 2010 DoddFrank Act in the US, yet even this should not materially derail ‘RegTech’s’ strong long term fundamentals – supported by the future roll-out of numerous new regulatory reforms such as, the above mentioned, Mifid II in Europe on 3rd January 2018.”
Over the last two years LRM have restructured their board to focus their attention on the areas of the business that has the most opportunity and as a result have achieved record interim revenues and strong forward looking order book.
Their double digit growth looks set to continue, helped by the ever increasing regulated environment financial institutions have to assimlate to, since the 2008 the financial crisis.
There maybe some short term pressure, due to it biggest shareholder reducing his stake but as I pointed out above, this could very much be seen as an opportunity.
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The content of this podcast (or content associated with it) is not intended as investment advice and people featured may hold positions in the companies they talk about. Please do you own research.